Forex Rollover Debits and Credits

Forex trades placed with brokers and held overnight are liable to receive, or be debited, interest. This is called rollover interest and we take a closer look at it in this article.

Forex Rollover interest explained.

Rollover interest is paid/debited to traders with open currency positions when trading closes at 5pm EST and is calculated daily. Whether a debit or a credit is applied depends on the currency the trader sold or bought relative to another currency. As all currencies trade as pairs, one nation’s currency is always relative to that of another currency. For example, if the EUR/USD pairing is held overnight, the interest payable is calculated by the difference between the interest rates in each location at the time of the rollover.

In the majority of cases, retail Forex brokers will automatically roll trades over. Interest is calculated on the trade’s total value rather than the margin used in the trade. For instance, a trader holding a single lot of EUR/USD will be debited or credited interest based on $100,000, not just the margin placed in the trade.

Rollover interest should not be thought of as a charge for the use of leverage. The credit/debit is derived from the difference between interest rates of the nations in the currency pairing being held.

Debits and Credits to Trading Accounts.

Let’s look at an example of rollover interest. Take a Forex trader holding the USD/JPY pairing. The trader is buying USD and selling the JPY. Let’s say that the USD has an interest rate of 2% and the yen just 0.5%. The Forex trader receives a credit of 1.5% per year (unleveraged). A trader selling the dollar and buying yen will be debited 1.5%.

Put simply, a trader is paid interest for each day they hold the highest interest-bearing currency or debited for each day of holding the lowest interest-bearing currency.

As banks are usually closed at weekends, the interest for Saturdays and Sundays is applied on the following Wednesday.

Profiting from Rollover.

Receiving rollover interest is a extra income stream in addition to regular capital gains. Day traders can keep positions open longer in order to gain interest, as long as they hold the higher rate-bearing currency. Investors and swing traders may also take longer positions with currency positions with which they long the highest interest-bearing currency.

In addition, traders that expect a currency pair to keep relatively flat over the course of a year, or end the year at current values, may profit from the rate differential between the currencies. Many traders use high levels of leverage to take full advantage of such rollover interest.